Securities Litigation Insights

© 2013 Vinson & Elkins LLP. All rights reserved.

By Clifford Thau, Steven Paradise,

Marisa Antos-Fallon, and Temilola Sobowale*

Recently we have seen a renewed focus on

securities litigation and regulatory enforcement

actions against energy companies. Chesapeake

Energy Corp. faced an SEC investigation and

investor suits when CEO Aubrey McClendon’s

borrowing practices became public, investors

accused First Solar, Inc. of concealing

manufacturing flaws in its solar panels, and BP

reached a settlement with the SEC concerning the

Deepwater Horizon explosion and spill. Looking

behind these headline stories, we highlight four

major securities litigation and regulatory issues that

are likely to continue to impact energy companies

going forward: (1) securities litigation regarding

alleged improper disclosure of safety issues, (2)

securities litigation related to reserve estimates in

public filings, (3) shareholder and regulatory focus

on hydraulic fracturing, and (4) a new SEC rule

requiring disclosure of certain payments made in

connection with resource extraction.

Securities Litigation Concerning Safety

Disclosures

In 2012 and 2013, the federal courts issued several

decisions in securities fraud cases against energy

companies alleging improper disclosure of safety

issues. Although these decisions each raise unique

issues of interest to the energy industry, one

common theme in these decisions is that they

provide examples of the types of safety disclosures

that a court will find “material” for purposes of a

securities law claim. Accordingly, for companies

working in potentially high-risk fields, these cases

supply helpful guidance for formulating safety

disclosures and evaluating litigation risk.

In February 2012, the U.S. District Court for the

Southern District of Texas dismissed securities

fraud claims against BP, p.l.c., B.P. America, Inc.

and officers and directors of both entities related to

the Deepwater Horizon explosion and spill.1

Although the court ultimately dismissed the

1 In re BP P.L.C. Securities Litig., 852 F. Supp. 2d 767 (S.D.

Tex. 2012). In a separate decision issued on the same day,

the court also dismissed in part securities fraud claims

brought against BP by a separate class of plaintiffs. In re BP

P.L.C. Securities Litig., 843 F. Supp. 2d 712 (S.D. Tex.

2012). Both decisions were issued prior to the SEC

settlement discussed above.

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Securities Litigation Insights

complaint due to plaintiffs’ failure to adequately plead facts

supporting their allegations of BP’s intent to deceive

investors, the court first ruled on the materiality of BP’s

alleged misstatements. The court held that BP’s general

statements highlighting its focus on managing risk and

commitment to safety were too vague to be material to a

reasonable investor, but found other BP statements

material despite a lack of specificity. For example, the court

found statements describing BP’s safety program as a

“common framework” for “all BP operations” material

because a reasonable investor would have considered the

breadth of the program important to his or her investment

decision. The court also found that BP’s decision to

highlight its safety program in its public filings was itself

evidence that the information was material. 2

Safety-related disclosures arose again when the

Southern District of New York dismissed fraud claims

against Transocean, Ltd. and its officers, again in

connection with the Deepwater Horizon spill, for failure to

allege either material misrepresentations or an intent to

deceive investors.3 On the issue of materiality, the court

examined Transocean’s allegedly misleading statements in

light of other public statements made during the same time

period and determined that statements suggesting that the

company was not facing systemic safety issues did not

conceal any material information. Specifically, the court

held that any disclosure of Transocean’s safety challenges

in these statements would not have “significantly altered the

total mix of information available” because the company

also disclosed, for example, that it would not pay safety-

related bonuses, and that it was commissioning an

independent audit of its safety procedures.

By contrast, in In re Massey Energy Co. Securities

Litigation, decided by the Southern District of West Virginia,

the court rejected defendants’ arguments that Massey’s

allegedly misleading safety metrics were not material

2 After plaintiffs in the BP action filed a consolidated amended

complaint, in February 2013 the court denied in part defendants’

renewed motion to dismiss, allowing securities fraud claims based on

certain alleged misrepresentations to proceed. The court’s analysis

focused on the falsity of the alleged misstatements, as defendants’

motion to dismiss did not challenge the materiality of the alleged

misstatements. See In re BP P.L.C. Securities Litig., 2013 WL 487011

(S.D. Tex. Feb. 6, 2013). 3 Foley v. Transocean, Ltd., 861 F. Supp. 2d 197 (S.D.N.Y. 2012).

because of other information in the marketplace.4

Specifically, the court found that whether public records

showing Massey’s safety infractions rendered Massey’s

allegedly false statements not material was a fact-specific

inquiry that could not be resolved on a motion to dismiss.

Also, like the BP court, the Massey court found that

seemingly vague statements can be material. For example,

the court found statements that safety “was the first priority”

and “job one every day” at Massey to be material because

(i) they described the company’s achievements and current

goals rather than predictions for the future and (ii) the

company “closely aligned their statements of commitment

to safety to their productivity and success as a company.”

The useful takeaways from the BP and Massey

decisions are that (i) courts may consider even general

statements concerning safety initiatives to be material,

(ii) facts concerning safety initiatives may be considered to

be material when emphasized in public filings and

statements, and (iii) misleading statements concerning

safety problems may be considered material even when

accurate information about the safety problems is otherwise

available to the market through other sources.

Securities Litigation Concerning Reserve Estimates

The past several years have also seen significant

regulatory enforcement activity and developments in private

securities litigation with respect to reserve estimates. In

2011, the SEC and the New York Attorney General started

investigations and issued subpoenas to numerous energy

companies relating to their reserve estimates. In August

2012, Exco Resources announced that the SEC had

recommended no enforcement action against the company,

and in September, another energy company with fracking

operations made a similar announcement. Investigations of

other companies, however, appear to be continuing. Cabot

Oil & Gas Corp.’s most recent quarterly report described

the subpoena from the New York Attorney General, with no

indication that the investigation had concluded. Quicksilver

Resources Inc.’s 2012 10-K included a similar disclosure

concerning the subpoena it received from the SEC, and

noted that representatives from the Company met with the

SEC in February 2013.

4 In re Massey Energy Co. Securities Litig., No. 10 Civ. 689, 2012 U.S.

Dist. LEXIS 42563 (S.D. W. Va. Mar. 28, 2012).

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In addition, in December 2012, a Texas Court of

Appeals issued a notable decision in a private securities

lawsuit alleging misrepresentations concerning reserve

estimates. In Highland Capital Management L.P. v. Ryder

Scott Co., the Court reversed a grant of summary judgment

in favor of Ryder Scott with respect to Texas Securities Act

(TSA) claims brought by Seven Seas Petroleum, Inc.

bondholders.5 The bondholders alleged that Ryder Scott,

retained by Seven Seas to provide reserve estimates, had

overestimated the value of Seven Seas’ proven oil

reserves, which estimates were included in Seven Seas’

public filings. With respect to claims that Ryder Scott had

aided and abetted violations of Section 33(C) of the TSA,

the Court rejected Ryder Scott’s argument that its proved

reserve estimates were rendered not material by cautionary

language in Seven Seas’ prospectus regarding the difficulty

of estimating oil and gas reserves. The Court held that

despite the “clear and prominent” cautionary language,

summary judgment was inappropriate because the reserve

estimate was a “preeminent consideration” for Seven Seas

investors, and because of Plaintiffs’ allegations that the

estimate was not made in accordance with industry

standards and SEC guidelines as Ryder Scott had

represented.

Although the claims in Ryder Scott were brought under

Texas state law, because the TSA and the federal

securities law are interpreted similarly, the Ryder Scott

decision provides useful guidance to energy companies

regarding the limitations of cautionary statements regarding

possible reserve estimates.

Shareholder and Regulatory Focus on Hydraulic

Fracturing

Although not yet the subject of securities litigation, hydraulic

fracturing (fracking) has recently been an area of focus for

both shareholders and regulators. For the past several

years, shareholder proposals requesting greater disclosure

related to fracking have appeared in proxy statements. In

2012, shareholder votes regarding fracking went forward at

Chevron, Ultra Petroleum, and ExxonMobil, receiving the

support of between 28 and 35 percent of shareholders.6 In

5 Highland Capital Management, L.P. v. Ryder Scott Co., No. 10 Civ.

362, 2012 WL 6082713 (Tex. App. – Houston [1st Dist.] Dec. 6, 2012). 6 ISS, 2013 U.S. Proxy Season Preview: Environmental & Social Issues

(March 7, 2013).

2013, shareholders of seven companies proposed

resolutions that would require a report on measures “above

and beyond regulatory requirements” to minimize risks

associated with fracking. Two of these proposals have been

withdrawn following an agreement between shareholders

and the companies.7

We understand too that the SEC’s Division of

Enforcement has investigated issuers’ disclosure of their

prospects for developing fracking operations.

The staff of the SEC’s Division of Corporation Finance

also has shown increased interest in disclosures relating to

fracking, requesting extensive fracking-related disclosures

as part of its comment letter process in recent years.

Requested disclosures include risks associated with

underground migration, wastewater disposal, and the

existence of toxic additives in fracking fluid.

In light of potential new regulations, emerging research

on safety implications, and public opinion related to

fracking, we are likely to continue to see new developments

in fracking operations. Given this changing landscape and

the high level of interest in this area on the part of

shareholders and regulators, companies should pay close

attention to their public disclosures concerning the potential

environmental, safety, and other operational risks related to

fracking.

New Disclosure Requirements for Resource Extraction

Issuers

The SEC’s Rule 13q-1 became effective November 2012

and was enacted in response to a provision in the Dodd-

Frank Wall Street Reform and Consumer Protection Act

(Dodd-Frank Act), requiring “resource extraction issuer[s] to

include in an annual report . . . information relating to any

payment made . . . to a foreign government or the Federal

Government for the purpose of the commercial

development of oil, natural gas, or minerals.”8 “Resource

extraction issuers” is defined to include those engaged in

the commercial development of oil, natural gas, or minerals.

The rule requires issuers to make annual filings

disclosing payments of $100,000 or more. The disclosure

must include the type and total amount of payments made

for each “project” and the government to which the payment

7 Id. 8 15 U.S.C. § 78m(q).

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is made. The rule has been criticized by industry groups

because of the ambiguity resulting from the SEC’s refusal

to define the term “project.” The SEC has also been

criticized for rejecting proposed exemptions in cases where

disclosure would violate the contract at issue, or the law in

the country of the contractual counter-party.

On October 10, 2012, several business and energy

industry groups filed suit against the SEC in the U.S.

District Court for the District of Columbia and a

simultaneous petition for review with the U.S. Court of

Appeals for the D.C. Circuit, each challenging the new Rule

and arguing, among other things: (1) that the Rule violates

the First Amendment by requiring companies to disclose

sensitive, confidential information that will cause economic

harm; (2) that the SEC acted in an arbitrary and capricious

manner under the Administrative Procedure Act by, among

other things, requiring public disclosure of payment

information seemingly not required by Dodd-Frank; and (3)

that the SEC violated the Securities Exchange Act of 1934

by adopting a rule that imposes an undue burden on

competition.

In its Response filed January 2, 2013, the SEC

disputed the petitioners’ First Amendment argument

claiming “the required factual, non-ideological disclosures”

do not constitute “compelled speech.” The SEC also argued

that it did not act arbitrarily and capriciously in rejecting

requested rule modifications and that an adequate

assessment of the economic implications of the Rule was

conducted.

On March 22, 2013, during oral argument before a

panel of D.C. Circuit judges, the court questioned both

parties about the existence of jurisdiction and whether

review in the D.C. Circuit was appropriate. As to the merits

of the case, the judges focused on whether the proposed

disclosures implicate First Amendment concerns. Counsel

for petitioners claimed that the statute “commandeers

corporate speech to force regime change in other nations,”

while the SEC’s counsel argued that the required factual

data does not reach the core values the First Amendment

seeks to protect. In response to the court’s questions

regarding the government interest in requiring the proposed

disclosures, the SEC took the position that the disclosures

are part of “a foreign policy objective to promote

transparency in resource rich countries.”9

Since Rule 13q-1’s reporting obligation does not begin

until the fiscal year ending September 30, 2013, we are not

likely to see private securities litigation or regulatory action

related to this rule for some time. Nevertheless, because

the Rule requires that the disclosure be filed, instead of

furnished, issuers could face future liability under Section

10(b) as well as Section 18(a) of the Exchange Act for any

materially false or misleading statements contained in the

disclosure. The need to demonstrate scienter (intent or

knowledge of the wrongdoing) under Section 10(b) as well

as the good faith defense available for Section 18(a) claims

will make such allegations difficult to plead and prove. Still,

the potential ambiguities surrounding the definition of

“project” and the resistance to disclosure of commercially

sensitive information could possibly leave companies

vulnerable to claims challenging disclosures filed pursuant

to this Rule.

*Clifford Thau and Steven Paradise are litigation partners in

the New York office of Vinson & Elkins LLP. Marisa Antos-

Fallon and Temilola Sobowale are associates in the

litigation department of the firm’s New York office. All are

members of the firm’s Securities Litigation and Enforcement

group. ■

By Michael C. Holmes, Elizabeth C. Brandon, and

Sarah H. Mitchell*

Two recent Court of Chancery opinions have expanded the

availability of direct claims for corporate stockholders

complaining of equity dilution under Delaware law. These

opinions have expanded the holding of Gentile v. Rossette,

906 A.2d 91, 99-100 (Del. 2006), which first established

that claims alleging equity dilution can be direct or

derivative.

9 American Petroleum Institute v. SEC, No. 12-1398 (D.C. Cir. filed Oct.

10, 2012).

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The distinction between direct and derivative claims is

particularly important in the post-merger context. For

example, minority shareholders of an acquired corporation

often allege that their equity was unfairly diluted pre-

merger, resulting in minority shareholders receiving a much

smaller share of the merger consideration. If this claim were

derivative, the minority shareholders would have no

standing to pursue it after a cash-out merger because the

merger eliminated their ownership interest in the acquired

corporation. But if the claim were direct, the minority

shareholders could pursue the claim even after the cash-

out merger.

Since Gentile, courts and commentators have indicated

that the availability of direct dilution claims is limited to

cases involving a majority, controlling stockholder. The

recent Chancery Court opinions illustrate that Gentile

claims are available in situations where there is no

controlling stockholder, either through a number of

stockholders working as a “control group” or through self-

dealing transactions by interested directors. These two

opinions illustrate that corporate boards should take great

care when issuing stock.

A Group of Minority Shareholders May Be a

“Control Group”

In In re Nine Systems Corp. Shareholders Litig., C.A. No.

3940-VCN (Del. Ch. Feb. 28, 2013), plaintiffs were the

former shareholders of Nine Systems Corporation (NSC).

Plaintiffs alleged that a group of three shareholders with a

combined ownership interest of roughly 54 percent acted to

unfairly dilute plaintiffs’ equity and voting power through a

series of self-dealing transactions involving recapitalization

of NSC. Plaintiffs alleged that the three shareholders

increased their collective ownership from 54 percent to 85

percent or even 90 percent.

Plaintiffs claimed that they were unaware of the dilution

of their shares until four years later, when Akamai

Technologies, Inc. (Akamai) proposed to purchase NSC for

$175 million. After the Akamai transaction closed, plaintiffs

lost their stockholder status. As a result, at summary

judgment, the defendants sought dismissal of the dilution

claims, arguing that the claims were properly derivative and

thus subject to dismissal under the “continuous ownership”

rule. The court disagreed.

Vice Chancellor Noble explained that, under the Gentile

exception, a derivative claim may also be a direct claim

when a controlling shareholder extracts or expropriates the

minority shareholders’ economic value and voting power.

Although NSC had no single majority shareholder, Vice

Chancellor Noble pointed out that a “control group” may be

the functional equivalent of a controlling shareholder.

Vice Chancellor Noble’s opinion clarified that plaintiffs

face a heightened standard in proving the existence of such

a control group. He noted that “[e]stablishing the existence

of a control group is not an easy task” and “[t]hat [the

alleged participants in the control group] signed on to a

common objective (i.e., shared parallel interests) is not

determinative.” He reasoned that this heightened standard

must apply so that every act taken by a majority is not

viewed as the act of a control group.

On the other hand, the court held that “[a]s long as the

facts of record support a reasonable inference — not

necessarily the better inference — that a control group

existed, summary judgment is not appropriate.” In the

instant case, Vice Chancellor Noble recognized that none of

the three major shareholders alone owned a majority of the

shares, none alone owed fiduciary duties, and each was

free to vote in its self-interest. Regardless, he declined to

grant summary judgment because the plaintiffs had put

forth sufficient evidence to create an issue of fact as to

whether there was a control group.

Specifically, the court held that the following evidence

in support of a control group was sufficient to defeat

summary judgment: (1) the three shareholders’ voting

majority allowed them to use written consents to approve

changes requiring shareholder consideration and gave

them majority control of the board, (2) the details of the

recapitalization plan were developed in advance of

meetings by the directors controlled by the three

shareholders while excluding other directors, and (3)

designees of the shareholders collaborated to develop the

structure of the new shares, which had the effect of

materially diminishing the rights of minority shareholders.

Notably, the court rejected the defendants’ argument

that they could not be a control group because one of the

three major shareholders chose not to participate in the

challenged transactions. The court noted that the third

shareholder was aware of the transactions and was given

the opportunity to participate, but declined. Because the

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third shareholder’s decision not to participate did not alter

the effect of the recapitalization on the minority

shareholders, the court held that there was sufficient

evidence of a control group to pass summary judgment.

At the motion to dismiss stage in the same action, Vice

Chancellor Noble likewise determined that the plaintiffs had

alleged facts to support a direct claim for equity dilution.

See Dubroff v. Wren Holdings, LLC, 2009 WL 1478697, at

*3 (Del. Ch. May 22, 2009). But plaintiffs’ success at the

summary judgment stage demonstrates that plaintiffs only

need to gather evidence creating a reasonable inference of

a control group to take a direct dilution claim to trial. To

avoid any appearance of impropriety, corporate directors

should ensure that interested blocs of directors do not

develop plans for new rounds of stock issuance among

themselves while excluding non-interested directors.

Court Explains How Control Can Be Exercised

By Non-Shareholders

The Delaware Court of Chancery’s opinion in Carsanaro v.

Bloodhound Technologies, C.A. 7301-VCL (Mar. 15, 2013)

significantly expanded the availability of direct claims for

corporate shareholders complaining of pre-merger equity

dilution. Before Carsanaro, such claims were only available

where a controlling stockholder existed before the merger

and expropriated value or control from minority

shareholders. Under Dubroff and Nine Systems, it is clear

that a group of shareholders whose combined ownership

interest is greater than 50 percent may be found to be a

control group, which is the functional equivalent of a

controlling shareholder. Carsanaro goes a step further by

holding that the control group need not hold more than 50

percent of the outstanding shares in order for a minority

shareholder to bring a dilution claim under Gentile.

Plaintiffs were the founder and software developers of

Bloodhound Technologies, Inc. (Bloodhound), a company

that created web-based software applications to allow

health care providers to monitor claims for fraud. In 1999,

Bloodhound was a startup company, and it sought venture

capital funding. Plaintiffs alleged that after Bloodhound

raised its initial rounds of venture capital financing, the

venture capitalists obtained control of Bloodhound’s board

of directors. Afterwards, plaintiffs alleged that the venture

capitalist-controlled board financed Bloodhound through

self-interested and highly dilutive stock issuances.

Plaintiffs alleged that they did not learn of the dilutive

stock issuances until April 2011, when Bloodhound was

sold for $82.5 million. At that time, plaintiffs discovered that

their overall equity ownership had been diluted to under one

percent. As a result of the equity dilution, plaintiffs received

less than $36,000 in the cash-out merger.

Plaintiffs also alleged that the board of directors unfairly

diverted proceeds of the merger. The board approved a

management incentive plan under which then-current

management of Bloodhound received $15 million of the

merger consideration.

In considering whether the plaintiffs had standing to

pursue direct claims after the cash-out merger, Vice

Chancellor Laster posed a hypothetical under which

individual board directors issued themselves shares of a

corporation in anticipation that the corporation would be

sold profitably in the near future. In the hypothetical, after

the stock issuance to the directors, the directors owned only

20 percent of the outstanding shares. Despite the absence

of a controlling shareholder or control group owning greater

than 50 percent of the company, Vice Chancellor Laster

stated that stockholders would have a direct claim against

the board of directors for breach of fiduciary duty under

Gentile.

The court also stated that stockholders have standing

to pursue direct challenges to dilutive stock issuances

where: (i) the complaint states a claim for breach of the duty

of loyalty, (ii) a controlling stockholder stood on both sides

of the transaction, or (iii) the board that effectuated the

transaction lacked a disinterested and independent

majority. On the other hand, the court stated that standing

would not exist if there is no reason to infer disloyal

expropriation. Specifically, the court noted two instances

where stockholders would lack standing to pursue direct

dilution claims: (x) where the board issued stock to an

unaffiliated third party as part of an employee compensation

plan and (y) where a majority of disinterested and

independent directors approves the terms of a stock

issuance.

Applying this test to the facts of Carsanaro, Vice

Chancellor Laster held that the plaintiffs had standing to

assert direct claims for wrongful expropriation and unfair

diversion of merger proceeds. He held that each stock

issuance was a self-interested transaction implicating the

duty of loyalty. He also held that the defendant

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stockholders and their director representatives could be

regarded as a control group for purposes of Gentile.

In light of these cases, boards should exercise care in

issuing stock in situations where a merger or similar

transaction may occur in the near future and should

consider utilizing a special committee process for

transactions involving potentially-dilutive stock issuances,

particularly where board members have an interest in the

entity acquiring the new stock.

*Michael C. Holmes is a litigation partner in the Dallas office

of Vinson & Elkins LLP and co-head of the firm’s Securities

Litigation and Enforcement group. Elizabeth C. Brandon

and Sarah H. Mitchell are associates in the litigation

department of the firm’s Dallas office. ■

By Elizabeth C. Brandon and Laurel S. Fensterstock*

In In re Revlon, Inc. Shareholders Litigation,10

Vice

Chancellor Laster commented that Delaware corporate law

might permit corporations to adopt forum-selection

provisions in their charters:

Perhaps greater judicial oversight of frequent filers [of derivative suits] will accelerate their efforts to populate their portfolios by filing in other jurisdictions. If they do, and if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive-forum for intra-entity disputes.

Vice Chancellor Laster’s implicit endorsement of these

forum-selection provisions in corporate charters and bylaws

sparked a flurry of amendments to existing corporate

charters designating exclusive forums for intra-corporate

disputes. In general, charter provisions were adopted or

proposed in connection with transactions where

shareholder approval was not required, i.e., initial public

offerings, spin-offs or reorganizations in bankruptcy.

10 C.A. No. 4578-VCL (Del. Ch. March 16, 2010).

Established companies, however, generally opted to adopt

amendments to bylaws. Since In re Revlon, exclusive-forum

provisions have been considered by several courts, with

mixed results.

A California Federal Court Addresses the Issue

After In re Revlon, the court in Galaviz v. Berg11

was the

first court to address a challenge to a forum-selection

clause. In Galaviz, shareholders of Oracle brought a

derivative action in federal court in California against Oracle

and its directors, alleging breach of fiduciary duties and

abuse of control. In 2006, well before the complaint was

filed but after the alleged wrongdoing occurred, Oracle’s

board amended the corporate bylaws to include a provision

selecting Delaware as the exclusive-forum for derivative

suits. Oracle sought to dismiss the complaint based on

improper venue because plaintiffs did not bring the case in

Delaware.

In January 2011, in a case of first impression, the court

denied the motion to dismiss and held that a forum-

selection provision at issue was not enforceable under

federal procedural law.12

In concluding that the exclusive-

forum provision constituted an impermissible “unilateral

amendment,” the court considered the following facts: (1)

the unilateral adoption of the provision by directors who

were defendants in a lawsuit after the majority of the

alleged wrongdoing had occurred; (2) the board adopting

the provision after shareholders had purchased Oracle

shares; and (3) the lack of shareholder approval. The court

observed, however, that “were a majority of shareholders to

approve” this type of provision (through a charter

amendment, for example), “the arguments for treating the

venue provision like those in commercial contracts would

be much stronger, even in the case of a plaintiff

shareholder who had personally voted against the

amendment.” Thus, the Galaviz holding raises questions

11 763 F. Supp. 2d 1170 (N.D. Cal. Jan. 3, 2011). 12 Id. at 1174-75. In determining the enforceability of forum-selection

clauses in contracts, federal courts consider, among other things, (1)

“whether the challengers were aware of their potential liability,” (2)

“whether the challengers were experienced business people,” (3)

“whether the forum-selection clause was hidden,” (4) “whether

enforcement of the forum-selection clause would deprive the

challenger of his or her ‘day in court,’” and (5) “whether any related

case was pending in the selected forum.”

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about the enforceability of unilateral amendments adopting

exclusive-forum provisions with no shareholder input.

Shareholders Respond to Galaviz

Following Galaviz, in 2012, shareholders filed a flurry of

cases in the Delaware Court of Chancery seeking to

invalidate forum-selection clauses from their respective

bylaws. The defendant companies in those lawsuits each

adopted its exclusive-forum bylaw after the In re Revlon

decision. Notably, the allegations in these lawsuits tracked

the rationale from Galaviz: because the exclusive-forum

bylaw was adopted without the consent of shareholders, the

amendment was invalid and the directors breached their

fiduciary duties by adopting them. Most of the defendant

companies repealed the challenged bylaw prior to the

deadline for responding to the complaint, which resulted in

dismissal of the complaints.13

Courts Inside and Outside of Delaware Construe

Forum-Selection Clauses

Following Galaviz, Delaware and other courts have

addressed the overall enforceability of forum-selection

clauses with varying outcomes. The following cases provide

insight into how courts have construed exclusive-forum

provisions in mutually-executed agreements or corporate

governance documents.

Enforced:

• In RWI Acquisition LLC v. Todd,14

the court granted

defendant’s motion to dismiss based on a forum-

selection clause. Plaintiff, a Delaware LLC (RWI Del.),

filed a declaratory judgment action in Delaware to

determine that defendant, a resident of New Mexico,

did not have any equity or other interests in RWI Del. In

connection with this investment transaction, the parties

entered into five agreements, two of which — the stock

13 Out of the 12 cases originally filed, 10 have been dismissed. In the

two cases that remain, Boilermakers Local 154 Retirement Fund, et al.

v. Chevron Corp., No. 7220, and ICLUB Investment P’Ship v. Fedex

Corp., No. 7238, defendants jointly moved for judgment on the

pleadings on the grounds that, among other things, the companies did

not need shareholder approval to adopt all bylaws. Plaintiffs filed their

opposition briefs on February 1, 2013, and Chancellor Strine heard

oral argument on the joint motion on April 10, 2013. A decision is

expected sometime before mid-July. 14 CIV.A. 6902-VCP, 2012 WL 1955279 (Del. Ch. May 30, 2012).

purchase agreement and the employment agreement

— contained forum-selection clauses in favor of the

state and federal courts in New Mexico. The court

granted defendant’s motion to dismiss for lack of

personal jurisdiction and improper venue, explaining

that in order to decide the interest defendant had in

RWI Del., it would first need to decide the rights

defendant had under the employment agreement that

mandated the action be brought in New Mexico. The

court reaffirmed the Chancery Court’s deference to

forum-selection clauses and explained that the court

will grant a motion to dismiss based upon a forum-

selection clause where the parties use express

language clearly indicating that the forum-selection

clause excludes all other courts before which those

parties could otherwise properly bring an action.

• In Carlyle Inv. Mgmt. L.L.C. v. Nat’l Indus. Group

(Holding),15

the court denied defendants’ motion to

vacate a default judgment based on the enforceability

of a forum-selection clause. Plaintiff, one of the largest

private equity firms in the world, and defendant, a multi-

national million dollar conglomerate, entered into a

variety of agreements whereby defendant would invest

in plaintiff’s closed-end investment funds that would

primarily be invested in residential mortgage-backed

securities. These agreements contained forum-

selection clauses requiring any disputes to be litigated

in Delaware. When the investments turned sour,

National Industries filed suit against Carlyle in Kuwait,

ignoring the forum-selection clauses. Carlyle then filed

suit to enjoin National Industries from litigating a

dispute regarding the agreements in Kuwait. A default

judgment was entered for Carlyle that included an anti-

suit injunction preventing National Industries from

litigating in Kuwait. National Industries sought to vacate

the default judgment. The court denied defendants

motion to vacate holding that the forum-selection

clause was enforceable; the parties consented freely

and knowingly to the court’s exercise of jurisdiction by

signing the agreement and international forum-

selection clauses should be enforced to maintain

international comity.

15 CIV.A. 5527-CS, 2012 WL 4847089 (Del. Ch. Oct. 11, 2012).

9

Not Enforced:

• In Duff v. Innovative Discovery LLC,16

the court denied

defendants’ motion to dismiss finding that the forum-

selection clause did not indicate the parties intent to

make jurisdiction exclusive. The issue before the court

was whether a forum-selection clause providing for

“sole” jurisdiction in California courts should be honored

when a conflicting forum-selection clause in a related

agreement provided for jurisdiction in Delaware courts.

In denying defendants’ motion to dismiss, the court

explained Delaware courts will only declare a forum-

selection clause “strictly binding” when the parties use

“express language clearly indicating that the forum-

selection clause excludes all other courts before which

those parties could otherwise properly bring an action.”

To the extent the forum-selection provisions in the two

agreements conflict, they make the parties’ intent as to

the contractual choice of forum far from “crystalline”

and the court will not interpret a forum-selection clause

to indicate the parties intended to make jurisdiction

exclusive. The court ruled that defendants failed to

show that California was the exclusive-forum for the

lawsuit.

• In Mitek Systems, Inc. v. U.S. Services Automobile

Association,17

a Delaware court refused to enforce a

forum-selection clause in a licensing agreement that

designated Delaware, the later filed action, as the

exclusive-forum for disputes related to the agreement,

finding instead that transfer to the first-filed action in

Texas was appropriate. In March 2012, USAA filed suit

in the Texas federal court, seeking a declaratory

judgment of non-infringement, invalidity, and

unenforceability of five patents covered by the license

agreement. After USAA filed suit, Mitek likewise filed

suit in Delaware federal court alleging that USAA

infringed the same five patents and breached the

license agreement. The Delaware court considered

whether the forum-selection clause of the license

agreement precluded the applicability of the first-filed

rule. Although the court noted that “the clause appears

valid” and agreed that a forum-selection clause is given

substantial consideration, the court explained that

16 CIV.A. 7599-VCP, 2012 WL 6096586 (Del. Ch. Dec. 7, 2012). 17 CIV. Action No. 12-462-GMS, 2012 WL 3777423, (D. Del. Aug. 30,

2012).

forum-selection clauses are not enforced when they

violate strong concerns of public policy. Finding that

judicial efficiency and comity would be undermined if

both the Texas and Delaware actions proceeded in

parallel, the district court determined that the forum-

selection clause did not preclude the application of the

first-filed doctrine and transferred the Delaware action

to Texas.

Rule on Clause Before Issuing Injunction

• Finally, a Texas appeals court recently considered a

procedural issue related to a forum-selection clause. In

In re MetroPCS Communications, Inc.,18

shareholders

challenged the pending merger of MetroPCS, Deutsche

Telekom and T-Mobile and sought a temporary

restraining order to enjoin several alleged “deal

protection devices,” including “Poison-Pill Lock-Up” and

“Force-the-Vote” provisions. The trial court granted the

TRO, agreeing with the plaintiffs that the deal

protection devices irreparably harmed shareholders by,

among other things, warding off other potential

acquirers. Defendants appealed the order because the

trial court failed to address their motion to dismiss or

stay the action based on the forum-selection clause in

MetroPCS’s bylaws, which mandated Delaware as the

proper forum. The appeals court found that because

the motion to dismiss or stay was filed before the

request for a TRO, the trial court abused its discretion

by granting injunctive relief without first ruling on the

forum-selection clause issue. Accordingly, the court

vacated the TRO and stayed the case until the motion

to dismiss could be decided.

Conclusion

The overall picture on exclusive-forum provisions in

corporate charters or bylaws remains unclear. Despite the

potential benefits to mitigate litigation costs, questions

remain concerning the enforceability of the provisions in

general and whether shareholder approval or input is

required in corporate governing documents. Depending on

the contract analysis a court applies and the ancillary

issues at play, some courts may find forum-selection

18 391 S.W.3d 329 (Tex. App. – Dallas 2013, orig. proceeding).

10

provisions contractually binding on shareholders while

others, like the court in Galaviz, will not.

*Elizabeth C. Brandon is an associate in the litigation

department of the Dallas office of Vinson & Elkins LLP.

Laurel S. Fensterstock is an associate in the litigation

department of the firm’s New York office. Both are

members of the firm’s Securities Litigation and Enforcement

group. ■

By Jennifer Poppe and Andrea Batista*

Introduction

With the passage of the Dodd-Frank Act, many investment

advisers to hedge funds are no longer exempt from

registration requirements and the myriad of obligations that

result from being regulated by the SEC. The SEC and other

regulatory authorities are relying on this new information to

monitor risk in the financial markets and uncover patterns of

misconduct. As recent comments from the Chief of the SEC

Enforcement Division’s Asset Management Unit and a

survey of recent SEC complaints show, enforcement

activity against hedge fund advisers is increasing. It is,

therefore, becoming increasingly important for sponsors of

private equity funds and hedge funds to comply with

registration requirements, identify conflicts of interest, and

appropriately disclose those conflicts.

Summary of the Dodd-Frank Registration Requirements for

Hedge Fund Advisers

In response to the financial crisis of 2008 and the lack of

transparency into the management of hedge funds and

other private funds, Title IV of the Dodd-Frank Wall Street

Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1376, 1570-1580 (2010) (the Dodd-Frank Act)

eliminated the private adviser exemption.19

As a result,

many advisers to hedge funds and private equity funds are

subject to the same registration requirements, regulatory

oversight, and examinations that apply to other SEC-

regulated investment advisers. Additionally, the Securities

and Exchange Commission (the SEC or Commission) and

Commodity Futures Trading Commission (CFTC) have

adopted rules that increase the amount of information

advisers must report related to their management of hedge

funds and other private funds. The SEC and CFTC make

no secret of the fact that the very same information may be

used in examinations and, ultimately, enforcement actions

against bad actors.

As a result of the elimination of the private adviser

exemption,20

private advisers, including most hedge fund

advisers (although there are certain enumerated

exemptions), must register with the Commission and file

periodic reports. Hedge fund managers are required to file

two forms: Form ADV and Form PF. While most information

on Form ADV is viewable by the public, Form PF, which

contains more sensitive information, is confidential and in

most instances will not be available to the public. Both are

designed to give federal regulatory authorities a view into

the management of private funds. Between the data

provided in both forms, the SEC has enhanced visibility into

the operations, strategies, and financials of many funds that

previously were not within the SEC’s purview.

In addition to the new reporting obligations, the SEC is

also emphasizing the importance of compliance through its

report on adviser registration. Since the March 30, 2012

deadline for investment advisers to file Form ADV, the

Commission has issued a report on compliance with the

requirement.21

The Commission reports that 1,504

19 Section 403 of the Dodd-Frank Act; see also Rules Implementing

Amendments to the Investment Advisers Act of 1940; Final Rule,

Release No. IA-3221 (June 22, 2011), 76 Fed. Reg. 42,950 (July 19,

2011) (to be codified at 17 C.F.R. pts. 275 & 279), available at

http://www.sec.gov/rules/final/2011/ia-3221.pdf (hereinafter Release

No. IA-3221). 20 Dodd-Frank Act § 403, 124 Stat. at 1571; Release No. IA-3221. 21 Securities and Exchange Commission, Dodd-Frank Act Changes to

Investment Adviser Registration Requirements (Oct. 1, 2012),

available at http://www.sec.gov/divisions/investment/imissues/df-

iaregistration.pdf (hereinafter Adviser Registration Report); 17 C.F.R.

§ 175.203-1(e) (stating that private advisers are exempt from

registration until March 30, 2012)

11

additional investment advisers have registered with the

SEC since the effective date of the Dodd-Frank Act through

October 1, 2012.22

Of all private fund assets registered with

the Commission, hedge fund assets constitute the majority

(54 percent).23

Recent comments from the Chief of the Enforcement

Division, as well as recent actions against hedge fund

advisers, signal increased enforcement focus on hedge

fund advisers.

Comments from the Chief of the Enforcement Division and

Recent SEC Complaints Signal Increased Focus on Hedge

Fund Advisers

On January 23, 2013, Bruce Karpati, the Chief of the SEC

Enforcement Division’s Asset Management Unit, confirmed

that enforcement activity against hedge fund managers and

other private equity managers that are new registrants will

likely increase.24

Karpati’s speech for Private Equity

International focused on reorganization, hiring, and special

initiatives within the Commission to address risk and

misconduct in the private equity and hedge fund industries.

Karpati’s comments reiterated points he made in a

December 18, 2012 speech before the Regulatory

Compliance Association. A summary of Karpati’s remarks

can be found here.

Just since October 1, 2012, the Commission has

initiated many actions against hedge fund managers

involving a variety of schemes. The types of misconduct

below represent some of the more notable enforcement

actions and are illustrative of how conflicts of interest, if not

managed, controlled, and disclosed, can spiral into

actionable misconduct. While some actions involve multiple

types of misconduct, these broadly fall into three

categories: (a) misappropriation of funds by hedge fund

advisers, either for the benefit of the company or individual

advisers to the detriment of investors, coupled with false

valuations of the funds to hide the scheme; (b) insider

trading on material nonpublic information; and (c)

22 Id. at 2. 23 Id. at 3. 24 Bruce Karpati, Chief, SEC Enforcement Division’s Asset Management

Unit, Q&A Remarks at the Private Equity International Conference

(Jan. 23, 2013), available at

http://www.sec.gov/news/speech/2013/spch012313bk.htm (hereinafter

Karpati Remarks).

manipulation of fund assets or valuations in order to inflate

the amount of fund management fees the adviser can

charge.

(a) Misappropriation of Funds and False Valuations

• SEC v. Hochfeld, No. 12 CV 8202 (S.D.N.Y): On

November 9, 2012, the SEC filed suit against Berton M.

Hochfeld (Hochfeld) and Hochfeld Capital

Management, L.L.C. (HCM).25

The SEC alleged that

Hochfeld, through HCM, managed Hepplewhite Fund,

LP (a hedge fund), and misappropriated assets from

the fund for personal use. Hochfeld also is alleged to

have materially overstated to the fund’s limited partners

the value of their investments. Hochfeld advised on the

hedge fund in violation of a prior bar by the SEC from

associating with an investment adviser.26

On March 19,

2013, the SEC ordered that Hochfeld again be barred

from association with any broker, dealer, investment

adviser, municipal securities dealer, municipal advisor,

transfer agent, or nationally recognized statistical rating

organization.27

• SEC v. Aletheia Research and Management, Inc., No.

12-CV-10692-JFW (RZX) (C.D. Cal.): On December

14, 2012, the SEC announced that it charged a Santa

Monica-based hedge fund manager, Peter J. Eichler,

and his investment advisor firm, Aletheia Research and

Management, Inc. (Aletheia), with conducting a “cherry-

picking” scheme by steering winning trades to their own

trading accounts to the detriment of their investors in

violation of their fiduciary duties to their clients.28

25 Complaint, SEC v. Hochfeld, No. 12 CV 8202, 2012 WL 5461591

(S.D.N.Y. Nov. 9, 2012). 26 On November 26, 2012, Hochfeld and HCM consented to the court’s

judgments against them including, among other relief, the appointment

of a receiver over the funds involved, an accounting of all assets

under their control, and an asset freeze over Hochfeld, HCM, and

Hepplewhite Fund, LP. Litig. Release No. 22545, SEC, Court Orders

Asset Freeze and Appointment of a Receiver in SEC Action Charging

Hedge Fund Adviser and Its Principal with Securities Fraud, 2012 WL

5928264 (Nov. 26, 2012), available at

http://www.sec.gov/litigation/litreleases/2012/lr22545.htm. 27 Order Instituting Admin. Proceedings, In re Berton M. Hochfeld,

Release No. 3570, 2013 WL 1122497 (Mar. 19, 2013), available at

http://www.sec.gov/litigation/admin/2013/ia-3570.pdf. 28 Litig. Release No. 22573, SEC, SEC Charges Santa Monica-Based

Hedge Fund Manager in Cherry-Picking Scheme, 2012 WL 6561124

(Dec. 14, 2012), available at

12

• SEC v. Commonwealth Advisors, Inc., No. 12-CV-700

(M.D. La.): On November 8, 2012, the SEC filed a

complaint against Commonwealth Advisors, Inc. and

Walter A. Morales alleging that they engaged in a

scheme to hide losses in certain hedge funds they

advised.29

Defendants also allegedly misrepresented

the percentage of the fund that was invested in a

certain collateralized debt obligation fund and

performed cross-trades while representing in Form

ADV that Commonwealth Advisors did not engage in

cross-trades. Defendants are also alleged to have

misled investors about the valuations of the funds they

managed and falsified documents to justify the

valuations.

• SEC v. New Stream Capital, LLC, No. 3:13CV264 (D.

Conn.): On February 26, 2013, the SEC filed a civil

injunctive action against hedge fund managers David

Bryson and Bart Gutekunst and their advisory firm,

New Stream Capital, LLC, alleging that they

deliberately concealed capital restructuring from fund

investors, which would also boost management fees.30

Specifically, the SEC alleged that the managers told

investors that they were all on an equal footing, when

they had in fact restructured the fund to provide priority

in the event of liquidation for certain large investors.

(b) Insider Trading

• SEC v. Chellam, No. 12-CV-7983 (S.D.N.Y.): On

October 26, 2012, the Commission filed a complaint

against Kris Chellam who was the Co-Managing

Partner of Galleon Special Opportunities Fund, a late-

stage venture capital fund affiliated with the hedge fund

investment adviser Galleon Management, LP. The SEC

http://www.sec.gov/litigation/litreleases/2012/lr22573.htm; Complaint,

SEC v. Aletheia Research & Mgmt., Inc., No. 12-CV-10692-JFW

(RZX), 2012 WL 6560050 (C.D. Cal. Dec. 14, 2012). Additionally,

Aletheia failed to disclose its financial troubles to its clients until

immediately before filing for bankruptcy. 29 Complaint, SEC v. Commonwealth Advisors, Inc., No. 12-CV-700,

2012 WL 5454010 (M.D. La. Nov. 8, 2012), available at

http://www.sec.gov/litigation/complaints/2012/comp-pr2012-222.pdf. 30 Litig. Release No. 22625, SEC, SEC Charges Connecticut Hedge

Fund Managers with Securities Fraud, 2013 WL 696098 (Feb. 26,

2013), available at

https://www.sec.gov/litigation/litreleases/2013/lr22625.htm; Complaint,

SEC v. New Stream Capital, LLC, No. 3:13-CV-00264, 2013 WL

680888 (D. Conn. Feb. 26, 2013).

alleged that Chellam conveyed material, non-public

information to Galleon founder Raj Rajaratnam.31

Chellam settled with the SEC on January 10, 2013,

agreeing to be barred from association with any broker,

dealer, investment adviser, municipal securities dealer,

or transfer agent.32

• SEC v. CR Intrinsic Investors, LLC, No. 1:12-CV-08466

(S.D.N.Y.): On November 20, 2012, the SEC filed suit

against CR Intrinsic Investors, LLC (CR Intrinsic),

Mathew Martoma, and Dr. Sidney Gilman for their roles

in a $276 million insider trading scheme involving a

clinical trial for an Alzheimer’s drug being jointly

developed by Elan Corporation and Wyeth.33

The SEC

alleges that Martoma caused hedge funds managed by

CR Intrinsic and another affiliated investment adviser to

trade on negative inside information he received from

Dr. Gilman concerning the clinical trials, which resulted

in significant gains to CR Intrinsic and a bonus for

Martoma. Gilman settled with the SEC.34

On March 18,

2013, the SEC announced that CR Intrinsic had agreed

to pay $600 million in disgorgement, penalties, and

interest.35

The settlement is the largest ever in an

insider-trading case. The settlement does not resolve

the case against Matthew Martoma, which continues.

• SEC v. Rajaratnam, No. 13-CV-1894 (S.D.N.Y.): On

March 21, 2013, the SEC filed a complaint against

Rajarengan “Rengan” Rajaratnam for making trades in

the hedge funds he managed at Galleon and Sedna

31 Complaint, SEC v. Chellam, No. 12-CV-7983 (S.D.N.Y. Oct. 26,

2012), available at

http://www.sec.gov/litigation/complaints/2012/comp-pr2012-216.pdf;

Press Release, SEC, SEC Charges Silicon Valley Executive for Role

in Galleon Insider Trading Scheme (Oct. 26, 2012), available at

http://www.sec.gov/news/press/2012/2012-216.htm. 32 Order Instituting Admin. Proceedings, In re Kris Chellam, Release No.

3532, 2013 WL 122654 (Jan. 10, 2013), available at

http://www.sec.gov/litigation/admin/2013/ia-3532.pdf. 33 Litig. Release No. 22539, SEC, Securities and Exchange Commission

v. CR Intrinsic Investors, LLC et al., Civil Action No. 12 Civ. 8466 (VM)

(Nov. 20, 2012), available at

http://www.sec.gov/litigation/litreleases/2012/lr22539.htm; Amended

Complaint, SEC v. CR Intrinsic Investors, LLC., No. 1:12-CV-08466,

2013 WL 1068347 (S.D.N.Y. Mar. 15, 2013). 34 Ct. Dkt. No. 3. 35 Litig. Release No. 22647, SEC, Securities and Exchange Commission

v. CR Intrinsic Investors, LLC et al., Civil Action No. 8466 (VM), 2013

WL 1122499 (Mar. 18, 2013), available at

http://www.sec.gov/litigation/litreleases/2013/lr22647.htm.

13

Capital Management based on material nonpublic

information supplied to him by his brother, Raj

Rajaratnam, who was charged in a massive insider-

trading scheme in 2012.36

In a parallel action, the U.S.

Attorney announced criminal charges against Rengan

Rajaratnam on the same day.

• SEC v. Teeple, No. 13-CV-2010 (S.D.N.Y.): On March

26, 2013, the SEC filed a complaint charging Matthew

Teeple, who worked at a hedge-fund advisory firm, with

insider trading, alleging that Teeple used inside

information about the merger between technology

companies Foundry Networks Inc. and Brocade

Communications Systems Inc. to bolster the earnings

of his firm’s hedge funds.37

The SEC also charged

Foundry’s CIO, for tipping Teeple, and a trader at

another firm, who Teeple then tipped and who used the

information in trading. Criminal charges have also been

filed against all three parties.

• SEC v. Steinberg, No. 1:13-CV-02082 (S.D.N.Y.): On

March 29, 2013, the SEC filed a complaint against

Michael Steinberg, a portfolio manager at Sigma

Capital Management, LLC (Sigma), for insider

trading.38

Steinberg received material nonpublic

information about Nvidia Corporation (Nvidia) from his

analyst, Jon Horvath, who was alleged to be one of a

group of analysts involved in a scheme to regularly

trade on inside information. Horvath and six other

members of this group of analysts were charged with

insider trading by the SEC in 2012.39

Steinberg used

the information he received from Horvath to execute

trades in Nvidia securities for Sigma. These trades

36 Litig. Release No. 22658, SEC, SEC Charges Rengan Rajaratnam

with Insider Trading, 2013 WL 1180854 (Mar. 22, 2013), available at

http://www.sec.gov/litigation/litreleases/2013/lr22658.htm; Complaint,

SEC v. Rajaratnam, No. 1:13-CV-01894, 2013 WL 1150902 (S.D.N.Y.

Mar. 21, 2013). 37 Litig. Release No. 2260, SEC, SEC Charges California-Based Hedge

Fund Analyst and Two Others with Insider Trading (Mar. 26, 2013),

available at http://www.sec.gov/litigation/litreleases/2013/lr22660.htm;

Complaint, SEC v. Teeple, No. 13 CV 2010, 2013 WL 1213813

(S.D.N.Y. Mar. 26, 2013). 38 Complaint, SEC v. Steinberg, No. 1:13-CV-02082, 2013 WL 1276631

(S.D.N.Y. Mar. 29, 2013), available at

http://www.sec.gov/litigation/complaints/2013/comp-pr2013-49.pdf. 39 Complaint, SEC v. Adondakis, No. 12-CV-00409, 2012 WL 130086

(S.D.N.Y. Jan. 18, 2012), available at

http://www.sec.gov/litigation/complaints/2012/comp-pr2012-11.pdf.

resulted in profits of about $3 million for Sigma, as well

as avoided losses. On March 15, 2013, in a related

case, the SEC filed a complaint against Steinberg’s

employer, Sigma, based on the same insider trading

allegations.40

On March 19, 2013, however, the SEC

announced that it had reached a settlement agreement

with Sigma, in which the company agreed to pay nearly

$14 million in disgorgement, penalties, and interest.41

(c) Manipulation of Fund Management Fees

• SEC v. Yorkville Advisors, LLC, No. 12-CV-7728

(S.D.N.Y): On October 17, 2012, the SEC filed a

complaint against Yorkville Advisors, LLC, Mark

Angelo, and Edward Schinik alleging that the

defendants falsely inflated values of investments held

by the hedge funds they managed in order to increase

the firm’s assets under management and increase the

amount of management fees owed to defendants.42

Defendants also allegedly used the false investment

returns to solicit investors to make additional

investments in the funds.

• SEC v. Tiger Asia Management, LLC, No. 12-CV-7601

(DMC) (D.N.J): On December 13, 2012, the SEC

charged the manager of Tiger Asia Management and

Tiger Asia Partners, Sung Kook “Bill” Hwang and

Raymond Y.H. Park, alleging two illegal trading

schemes involving a hedge fund.43

In particular, one

trading scheme allegedly involved stocks that were

among the largest short position holdings in the hedge

fund portfolios managed by defendants. Hwang

40 Complaint, SEC v. Sigma Capital Management, LLC, No. 1:13-CV-

01740, 2013 WL 1069149 (S.D.N.Y. Mar. 15, 2013), available at

http://www.sec.gov/litigation/complaints/2013/comp-pr2013-42.pdf. 41 Litig. Release No. 22650, SEC, Securities and Exchange Commission

v. Sigma Capital Management, LLC, et al., Civil Action No. 13-CIV-

1740, 2013 WL 1143081 (Mar. 19, 2013), available at

http://www.sec.gov/litigation/litreleases/2013/lr22650.htm. 42 Litig. Release No. 22510, SEC, SEC Charges Hedge Fund Adviser

and Two Executives with Fraud (Oct. 17, 2012), available at

http://www.sec.gov/litigation/litreleases/2012/lr22510.htm; Complaint,

SEC v. Yorkville Advisors, LLC, Civil Action No. 12-CV-7728

(S.D.N.Y.) (Oct 17, 2012), available at

http://www.sec.gov/litigation/complaints/2012/comp22510.pdf. 43 Litig. Release No. 22569, SEC, Securities and Exchange Commission

v. Tiger Asia Mgmt., LLC, Civil Action No. 12-CV-7601 (DMC), 2012

WL 6457308 (Dec. 13, 2012), available at

http://www.sec.gov/litigation/litreleases/2012/lr22569.htm.

14

directed Park to place trades in the stocks to depress

the stock prices and inflate the management fees they

could charge to investors. Hwang, Park, and the firms

involved in the litigation have agreed to settle with the

SEC for a large amount in disgorgement and penalties.

• In re John Thomas Capital Management Group LLC,

File No. 3-15255 (ALJ): On March 22, 2013, the SEC

filed an administrative action against George R.

Jarkesy, Jr., Anastasios “Tommy” Belesis, John

Thomas Capital Management Group LLC (JTCM), and

John Thomas Financial, Inc. (JTF), all of whom are

alleged to have been involved in a scheme to defraud

investors in JTCM’s two hedge funds.44

Jarkesy

manages JTCM, and Belesis is the CEO of JTF, which

served as the primary placement agent for JTCM’s two

hedge funds. The SEC alleged that Jarkesy and JTCM

recording inflated valuations for the funds’ largest

holdings and breached their fiduciary duty to the funds

by loaning money from the funds to other entities,

under the condition that the loans diverted large fees to

JTF and Belesis.

* Jennifer Poppe is a litigation partner in the Austin office of

Vinson & Elkins LLP. Andrea Batista is an associate in the

litigation department of the firm’s Austin’s office. Both are

members of the firm’s Securities Litigation and Enforcement

group. ■

Securities Litigation Insights is published by the Securities

Litigation practice group of Vinson & Elkins LLP. This

newsletter is not intended to be legal advice or a legal

opinion on any specific facts or circumstances. The

contents are intended for general information only. Results

described herein may be subject to reconsideration or

appeal. Prior results do not guarantee a similar outcome.

Application of the information reported herein to particular

facts or circumstances should be analyzed by legal

counsel.

44 Order Instituting Administrative and Cease-and-Desist Proceedings, In

re John Thomas Capital Mgmt. Grp. LLC, d/b/a Patriot28 LLC, File No.

3-15255, 2013 WL 1180836 (Mar. 22, 2013), available at

http://www.sec.gov/litigation/admin/2013/33-9396.pdf.

15

Securities Litigation Insights

Securities Litigation Practice Contacts

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